Rossendale Borough Council v - Hurstwood Properties (A) Ltd & Ors

The court heard strike-out applications under CPR 3.4(2) by defendants in representative business‑rates claims challenging the efficacy of arrangements whereby defendants granted short leases of unoccupied hereditaments to special purpose vehicle companies (SPVs) and those SPVs were thereafter dissolved or wound up.

The judge ruled that: (1) the scheme leases, as pleaded, are not pleaded or evidenced as sham transactions and the particulars do not plead the necessary dishonest common intention required for a finding of sham (Snook and subsequent authorities); (2) the Ramsay line of cases (treating composite tax‑avoidance schemes as a whole for statutory construction) has no arguable application to negate the effect of the genuine scheme leases in these cases; but (3) there is an arguable case, based on the principles in Prest v Petrodel, that the separate corporate personality of the SPVs could be disregarded so as to render the original defendants liable for business rates, because it is arguable that artificial SPVs were interposed to divest defendants of an ongoing liability.

The judge therefore struck out the sham and Ramsay limbs of the pleaded case but refused to strike out the pleaded claim that the SPVs should be disregarded (piercing the corporate veil/principled development of Prest), and directed that the pleadings be clarified in respect of demand notices for each hereditament.

Background and parties:

• The claims are representative first‑instance proceedings by local authorities for recovery of unpaid national non‑domestic (business) rates allegedly avoided by use of marketed schemes involving SPVs taking short leases of unoccupied hereditaments and then being dissolved or wound up. Two claims were selected as test cases (Rossendale Borough Council v Hurstwood Properties A Ltd and Wigan Council v Property Alliance Group Ltd).

Nature of application: The defendants applied to strike out the claim forms and particulars of claim (in whole or in part) under CPR 3.4(2) for disclosing no reasonable grounds, and sought indemnity costs.

Issues framed:

• Whether the scheme leases are shams (such that they have no legal effect).
• If leases are genuine, whether the Ramsay principle applies so as to treat composite transactions holistically and disregard artificial intermediary steps.
• Alternatively, whether the corporate veil can be pierced or the SPVs disregarded so as to leave the defendant liable (Prest and related jurisprudence).
• Pleading sufficiency, including whether the particulars plead primary facts capable of supporting allegations of dishonesty or veil piercing, and whether demand notices have been served.

Court's reasoning and conclusions:

• On sham: the judge applied the classic definition of sham (Snook and authorities) and concluded the particulars only allege artificiality and uncommerciality, not the requisite dishonest common intention shared by all parties to the lease. As a result, there were no reasonable grounds to maintain a sham claim against the scheme leases.
• On Ramsay: the judge analysed Ramsay and its development (MacNiven, UBS and related authorities) and concluded Ramsay did not assist the claimants because the scheme lease, if genuine, passed immediate entitlement to possession to the SPV and subsequent insolvency or striking off did not automatically re‑vest possession in the landlord without statutory disclaimer; thus Ramsay had no arguable application to negate the leases' legal effect in these proceedings.
• On piercing the corporate veil/Prest: the judge considered Prest and its distinction between concealment and evasion. He held that it was at least arguable that defendants procured and controlled artificial SPVs to divest themselves of an ongoing liability for business rates and that Prest (or principled development of it) might permit disregarding the SPVs; the particulars do not presently disclose no reasonable grounds for that limb and the issue requires disclosure and trial to determine control and the existence of an existing liability.
• On pleading of demand notices: the judge observed that the obligation to pay arises on service of a statutory demand notice under the collection regulations and directed that the particulars should plead when demand notices were served for each hereditament.

Practical outcome: The strike‑out application succeeded in relation to the sham and Ramsay arguments but failed in relation to the Prest/veil‑piercing limb, which was allowed to proceed to disclosure and, if necessary, trial.

Application to strike out was allowed in part and dismissed in part. The court held that the particulars disclosed no reasonable grounds for a claim that the scheme leases were shams and that the Ramsay principle had no arguable application to negate the effect of genuine leases; however, the court found there was an arguable case that the SPVs might be disregarded under Prest (or a principled development of it) so that the defendants could remain liable for business rates, and that pleading should be clarified as to the service of demand notices.